Moody's: Indian corporates benefit from strong domestic fundamentals, despite external pressures

Moody's Investors Service says that most non-financial corporates it rates in India (Baa3 positive) will benefit from strong domestic growth and accommodative monetary policy, although weak global growth and a potential US rate hike will weigh on businesses.

"Healthy 7.5% GDP growth for India for the fiscal year ending March 2017 (FY2017) and a pick-up in manufacturing activity will be broadly supportive of business growth," says Vikas Halan, a Moody's Vice President and Senior Credit Officer.

"However, the corporates remain vulnerable to the volatile Indian rupee as against the US dollar and to low commodity prices, which has in turn led to a sharp decline in external trade," adds Halan.

The fall in commodity prices has benefited many Indian corporates given the country's status as a net important of raw materials and its recent history of high inflation.

The resultant moderating inflation should result in lower borrowing costs for corporates and yields on corporate bonds, says Moody's.

But despite these overall supportive domestic conditions for the country's corporates, potential headwinds loom from a loss of reform momentum.

The Modi administration so far this year has been unable to enact legislation on key reforms, including a unified goods and services tax and the Land Acquisition Bill.

It seems highly unlikely that the major reforms will get enacted by the upper house of the Indian parliament where the ruling coalition is in minority. A failure to implement these reforms could hamper investment amid weak global growth.

By sector, Moody's expects upstream oil & gas companies to benefit from lower fuel subsidy burdens, although low crude and domestic natural gas prices will continue to hurt profitability.

Refining and marketing companies meanwhile should benefit from healthy margins as demand growth outpaces expected capacity additions.

Moody's negative outlook for the steel industry reflects elevated leverage and an extended period of low prices due to continuing steel imports, while the negative outlook for metals and mining companies reflects bleak global commodity prices.

In the real estate sector Moody's expects demand to improve in 2016 on the back of lower interests rates, although approval delays could push back project launches for property developers.

In the auto sector, Moody's expects retail sales volumes to grow 6% in 2016 on the back of sustained growth in passenger vehicles sales and a recovery in commercial vehicle sales.

The telecom companies that Moody's rates in India have reported improving revenue per user (ARPU) and EBITDA margins, however competition remains intense and the regulatory framework continues to evolve.

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